A savvy asset allocation for college funding might include:
Bonds: Buy bond funds inside a 529 college savings plan, where the interest income won’t be taxed. Under current law, you can take tax-free withdrawals to pay for higher education.
Stocks: Invest in stocks through a tax-managed mutual fund you hold in your own name. These funds avoid passing through tax bills to investors each year.
If you need to take gains with your stock funds, first give away shares to your student. He or she can take those gains, pay only 5 percent in tax, and then use the net proceeds to pay college bills.
However, the latter strategy may not be wise if your student will qualify for need-based financial aid. In that case, you might be better off taking the gains in your own name and paying a 15 percent tax.
